PRICING

How do consumers process and evaluate prices? How should the company set initial prices for products or services? How should a company adapt prices to meet varying circumstances and opportunities? When should a company initiate a price ? How should a company respond to a competitors price change?
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PRICE Price is the amount we pay for a good or a service or an idea.

is the amount for which a product, a service or an idea is exchanged, or offered for sale regardless of its worth or value, to the potential purchaser.
In

general terms price is the result of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller).
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Pricing is the art of translating into quantitative terms (rupees and paisa) the value of product or a unit of a service to customers at a point. We can say pricing is the function of determining the product or service or idea value in monetary terms by the marketing manager before it is offered to the target consumers for sale. Pricing is the process of determining what a company will receive in exchange for its products. Pricing is a process of setting objectives, determining the available flexibility, developing strategies, setting prices and engaging in implementation and control.

Pricing decisions can have important consequences for the marketing organization and the attention given by the marketer to pricing is just as important as the attention given to more recognizable marketing activities. Some reasons pricing is important include:
Most Flexible Marketing Mix Variable For marketers price is the most adjustable of all marketing decisions. Unlike product and distribution decisions, which can take months or years to change, or some forms of promotion which can be time consuming to alter (e.g., television advertisement), price can be changed very rapidly. The flexibility of pricing decisions is particularly important in times when the marketer seeks to quickly stimulate demand or respond to competitor price actions. For instance, a marketer can agree to a field salespersons request to lower price for a potential prospect during a phone conversation. Likewise a marketer in charge of online operations can raise prices on hot selling products with the click of a few website buttons.
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Setting the Right Price Pricing decisions made hastily without sufficient research, analysis, and strategic evaluation can lead to the marketing organization losing revenue. Prices set too low may mean the company is missing out on additional profits that could be earned if the target market is willing to spend more to acquire the product. Additionally, attempts to raise an initially low priced product to a higher price may be met by customer resistance as they may feel the marketer is attempting to take advantage of their customers. Prices set too high can also impact revenue as it prevents interested customers from purchasing the product. Setting the right price level often takes considerable market knowledge and, especially with new products, testing of different pricing options. Important Part of Sales Promotion Many times price adjustments are part of sales promotions that lower price for a short term to stimulate interest in the product.
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FACTORS INFLUENCING THE PRODUCT PRICING The marketing executives set the product prices between an upper and lower limit. Upper limit is the highest value that the customer is likely to put on the product or services at a given point of time. Lower limit is the cost of producing, promoting, distributing and includes reasonable margin. Within these extreme limits, the actual price is influenced by internal and external factors. INTERNAL FACTORS
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Organizational factor : Organizational factors refer to the internal arrangement or mechanism for decision making and its implementation (between higher and lower level) .
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2. Marketing mix : Pricing decisions must be seen as a part of total marketing strategy and should avoid conflict with other elements (product , promotion and place). 3.Product differentiation : Product differentiation is the ability of a manufacturer to make his product distinctive from others in the market. 4.Product costs : It is the effort of every concern to cover all the costs so that the firm has the fair chances of making surplus. 5. Product life-cycle : It is the stage of the product life-cycle in which the product is treading through that determines the exact nature of price policy in a given concern. 6. Pricing objectives : The nature of pricing policy is dictated by a set of objectives (guide lines) to be attained as set by the top management authorities. 7. Functional position : Functional position of the manufacturers, wholesaler and retailer has its own impact on the firms pricing policy.

EXTERNAL FACTORS a. Product demand : Demand is the single most factor having tremendous impact on price, pricing policy and strategy followed by the firm. The pricing decision will vary depending on the exact nature and the extent of elasticity. b. Competition : Pricing policy of the firm depends on competitors pricing and substituting policies. c. Economic condition : The economic conditions prevailing in the region have decisive impact on firms pricing policy. d. The buyer behavior : Buyers here mean both business buyers and final users and thus their behavior have an impact on the pricing policy. PRICING OBJECTIVES 1.SURVIVAL:- it is the most fundamental objective. Survival price objective is a short run or a temporary goal and is insisted only when the firm faces a survival crisis.
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2.PROFIT:-The fundamental objective of organisations is to maximize their profits. Their profits are directly dependent on the prices of their products because pricing, to a certain extent is a controllable factor in the profit equation. 3.RETURN ON INVESTMENT:-Objective of pricing products of an organization is to attain a specified return on their investments. Organization adopts trial and error method wherein the company arrives at the best pricing alternatives to leverage the maximum return on investment. 4.MARKET SHARE:-Objective is to increase or maintain the market share. Target market share means that portion of the industry sale which a company aspires to attain. This market share is normally expressed as a percentage of the total industry sales. 5.STATUS QUO:-Firms adopt a status quo approach to pricing to maintain a certain level of stability in its prices or to maintain the market share.
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6.PRODUCT QUALITY:-Firms try to set the prices of the products to reflect the products quality leadership in the market , Its the sum total of the impression that the people have about the firm. PRICING METHODS OR PRICING STRATEGIES

COST BASED PRICING DEMAND BASED PRICING COMPETITION-ORIENTED PRICING VALUE PRICING AFFORDABILITY-BASED PRICING DIFFERENTIATED PRICING

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COST BASED PRICING : The method of setting the price of the products based upon the cost incurred in producing the product is considered as cost based pricing. The cost can be classified as fixed cost, variable cost and semi variable cost or it can also be classified as direct cost and indirect cost. Under the cost based pricing category, the following approaches are used :
Mark-up

pricing/cost plus pricing Absorption cost pricing Target rate of return pricing Marginal cost pricing

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 MARK

UP PRICING/ COST PLUS PRICING: Markup pricing refers to the pricing method in which the selling price of the product is fixed by adding a margin to its cost price. The mark-up price vary depending on the nature of the product and the market. ABSORPTION COST PRICING/FULL COST PRICING: This method rests upon pricing a product after estimating the unit cost of the product under the normal level of production and sales. The total cost of the product is derived after adding the three operations i.e., manufacturing, administering and selling overheads. The selling price is derived by adding a margin of profit to the total cost estimated. TARGET RATE OF RETURN PRICING: The rate pricing uses a rational approach to arrive at the selling pricing i.e., the price is fixed in such a way that the return on the investment of the firm is met in the process of sales. The target rate of profits is fixed.
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MARGINAL COST PRICING: Marginal costs includes all the direct variable costs of the product. It aims at realizing all the variable cost of the product as well as a portion of fixed cost of the product by setting the right selling price depending upon the market situation. MERITS AND DEMERITS OF COST BASED PRICING: MERITS: Firm is assured of target profits. Risk involved is minimal. DEMERITS: Assumes a level of demand for the product. Sales volumes are lost due to high profit margins.

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DEMAND BASED PRICING Refers to pricing the product based upon the demand in the market. The sales and profits are independent on the costs but are dependent on the demand and hence pricing relates to demand. The following methods are used under demand based pricing:
what

the traffic can bear method the product

Skimming

Penetration pricing method

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WHAT THE TRAFFIC CAN BEAR PRICING:

PRICING: This method actually skims the market in the first instance through high pricing and subsequently settles down for a lower price after attaining a particular period of time. PRICING: As the name indicates, seeks to achieve greater penetration into the market through relatively low prices. This method is useful in case of launching a new product in the market under certain circumstances.
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PENETRATION

A method of pricing in which a manufacturer s price is determine more by the price of the similar product sold by powerful competitors, than by consideration of consumer demand and cost of production.

Industries that sell commodity such as steel, paper or fertilizer, firms

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Some firm may charge a bit more or less, but they hold the amount of difference constant. E.g.:-minor gasoline retailers usually charge a few cents less than the major oil companies, without letting the difference increase or decrease. Competition based pricing is quite popular and it also helps in preventing price wars. Competition based pricing is also used when firm bid for contracts VALUE-PRICING In this, they win Loyal customers by charging a fairly low price for a high quality offering. e.g. Big Bazaar
Value

based pricing is dependent upon an understanding of low customer value through careful evaluation of customer operations

Purpose of pricing is not to recover costs but to capture the value of product perceived by customer
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As

long as the marketer is able to deliver the value in excess of his cost his profits are ensured Price = Value > cost

Survey methods sometimes used to determine value

Value

is a benefit but a benefit is not necessary value to all customers

Value pricing strategies: a. Special packaging b. Payment option c. Personalized service d. Free product updates or refresher e. Bonus offer f. Certification
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AFFORDABILITY BASED PRICING It is relevant in respect essential commodities which meets the basic needs of all sections of the people. The main idea is to fix a price which is AFFORDABLE by all sections of the population so that they are in position to buy and consume the product to the require extent. This is why, it is also known as SOCIAL WELFARE PRICING. The price is set independent of the cost involved. It is subsidized by the state i.e. an element of subsidy is involved and the items are often distributed by the Public Distribution System. DIFFERENTIATED PRICING Companies often adjust their basic price to accommodate differently in customers , products, locations and so on.

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It occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs. It is also known as PRICE DISCRIMINATION as price of the same product and services is discriminated on different basis. DEGREES of Price Discrimination

FIRST-DEGREE PRICE DISCRIMINATION:-Here the seller charges a separate price to each customer depending on the intensity of his or her demand. SECOND-DEGREE PRICE DISCRIMINATION: Here the seller charges less to buyers who buy a larger volume. THIRD-DEGREE PRICE DISCRIMINATION:-Here the seller charges different amounts to different classes of buyers, as in the following cases:

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CUSTOMER-SEGMENTPRICING-Different prices for the same product or services by the different groups of customer. E.g.-Museum admission fee for students. PRODUCT-FORM PRICING-Different price for the different form of the same type of product. E.g.-Mens shirts at Big Bazaar of different styles, fabrics and levels of quality. IMAGE PRICING-Different price for the same product at two different levels based on image difference. E.g.-Cosmetics and garments industries CHANNEL PRICING-Different price for the same product or services at different channels. E.g.-Coca-cola price in a restaurant, a fast food restaurant or a vending machine.
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LOCATION PRICING-Different price for the same product at different locations even if though the cost of offering it at each location is the same. E.g.-A theaters seat prices varies according to audience preferences. TIME PRICING-Prices differs by season, day or hour for the same product and services. E.g.-Restaurants charges less to early birds customers, and some hotels charges less on weekends. SETTING THE PRICE A firm must set a price for the 1st time when it develops a new product, when it introduces its regular products into a new distribution channel or geographical area and when it enters on new contract work. The firm has to consider many factors in setting its price policy which can be done in several steps.
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1.SELECTING THE PRICE OBJECTIVE

The co. first decides where it wants to position its market offering. The clear is a firms objective easier is to set the price.

a. b. c. d. e. f.

The major objectives a company can pursue through pricing are: survival maximum current profit maximum market share maximum market skimming product quality leadership other objectives

2.DETERMINING DEMAND Each price leads to a different level of demand and therefore have a different impact on a companys marketing objectives. In the normal case demand and price are inversely related.
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FACTORS DETERMINING DEMAND a. price sensitivity b. estimating demand curve c. price elasticity of demand

3. Estimating costs
Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company wants to charge a price that covers its cost of production ,distributing , and selling the product , including a fair return for its efforts and risks. TYPES OF COST Variable Fixed Average total costs
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4. Analysing competitors , cost , prices and offers Within the range of possible prices determined by market demand and company costs, the firm must take competitors costs price and possible price reactions into account. Selecting a Pricing Method: The 3 Cs: Customers Demand Schedule Cost Function Competitors Prices Price Setting Methods : are of 7 types Mark-up Pricing Target-Return Pricing Perceived-Value Pricing Value Pricing

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Going-Rate Pricing Auction Type Pricing Group Pricing Mark-up Pricing Variable Cost Per Unit100 Fixed Cost 3000 Expected Unit Sales 50000 Manufacturers Unit cost= VC+FC/Sales Mark-up Price 20%= Unit Cost/(1- Desired return on sales) Target-Return pricing Target Return on Investment. Used by General Motors(15 20 %) TRP=

Unit cost + Desired Return x Invested cap unit sales

Perceived Value Pricing Buyers Image of the product performance Channel Deliverables Warranty Quality Customer Support Suppliers reputation Trustworthiness Esteem Ex: DuPont Types Of Buyers Price Buyers - Stripped down Products with reduced Services Value Buyers - Innovate new value By re-affirming their value Loyal Buyers - Relationship Building, Customer intimacy.
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Value Pricing Win loyal customers by charging fairly low price for high quality offering. Ex: Wal-Mart, South West Airlines. Types- Everyday Low pricing (EDLP) (constant low price) High Low pricing (HLP) (high Constant, Sudden lowering) Going-Rate Pricing Based on Competitors Prices. Oligopolistic industry: (A Market characterized by a small number of
producers who often act together to control the supply of a particular good and its market price.)

Ex: Steel, Paper, Fertilizer Etc Follow the leader- Reduce/increase price accordingly.
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Auction-Type Pricing Types: English Auctions (Ascending) 1 seller, many buyers- antiques, cattle, real estate Dutch Auctions (Descending) 1 seller, many buyers or 1 buyer many sellers. High to low price. Sealed-Bid Auctions One bid Cannot know other bids. Group Pricing Joining groups to buy at a lower price. Volumebuy.com Ex: Electronics, Computers, Subscriptions etc.
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Selecting The Final Price Additional factors to be considered. Psychological Pricing: 299 Rs instead of Rs 300 248 Rs instead of Rs 250 Gain & Risk-Sharing Pricing: People Resist expecting high level of perceived risk. Influence of other Marketing-Mix Element Brands Quality Advertising

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Product Mix Pricing Strategy 1. Product line pricing: setting prices across an entire product line 2. Optional-product pricing: pricing optional or accessory products sold with the main product. 3. Captive-product pricing: pricing products that must be used with the main product. 4. By-product pricing: pricing low-value by-products to get rid of them 5. Product bundle pricing: pricing bundles of products sold together. Product line pricing: setting the price steps between various products in product line based on cost differences between the products, customer evaluations of different features , and competitors prices. Ex Bata offers an entire range of footwear in India , from premium collection to ordinary leather shoes . It also has a collection of chappals and sandals. For women , it offers a wide range of foot wear , from fashionable footwear for parties to regular ones for everyday use.
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Optional-product pricing: The pricing of optional or accessory products along with the main product. Ex : a car buyer may choose to order a GPS (Global Positioning System is a
space-based global navigation satellite system (GNSS) that provides location and time information in all weather, anywhere on the Earth ) navigation system and

Bluetooth wireless communication. Captive-product pricing: setting a price for products that must be used along with a main product ,such as blades for a razor and film for a camera. Ex you can buy a Gillette Mach3 razor with a replacement cartridge and storage and storage case for under Rs. 200. but once youve bought the razor , youre committed to buying replacement cartridges at about Rs. 750 an eight pack. By-product pricing: setting a price for by products in order to make The main products price more competitive. In producing products and services often generate by-products.
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If the by-products have no value and if getting rid of them is costly, this will affect the pricing of the main product. Using by-product pricing, the manufacturer will seek a market for these by-products and should accept any price that covers more than the cost of storing and delivering them. Product bundle pricing: combining several products and offerings the bundle at a reduced price. Ex Fast food restaurants bundle a burger, fries, and a soft drink at a combo price. Price Adjustment Strategies:
1. 2. 3. 4. 5. 6. 7.

Discount and allowance pricing Segment pricing Psychological pricing Promotional pricing Geographical pricing Dynamic pricing International pricing
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Discount and allowance pricing: Discount: a straight reduction in price on purchases during a stated period of time. Cash discounts Quantity discounts Functional discount/ trade discount Seasonal discount Allowance: promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturers products in some way. Segment pricing: selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Customer segment Product-form pricing Location pricing Time pricing. 34

Psychological pricing: a pricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product. Ex: custr usually perceive higher-priced products as having higher quality . When they can judge the quality of the product by examining it or by calling on past experience with it, they use price less to judge quality. But when they cannot judge quality because they lack the information or skill , price becomes an important quality signal. Reference prices: prices the buyer s carry in their minds and refer to when they look at a given product. Is formed by noting current prices, remembering past prices, or assessing the buying situation. Promotional pricing: temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales. Geographical pricing: setting prices for custrs located in different parts of the country or world.

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FOB-origin pricing: (free on board ) a geographical pricing strategy in which

Uniform delivered pricing: a geographical pricing strategy in which the company charges the same price plus freight to all custrs, regardless of their location. Zone pricing: in which the company sets up two or more zones . All custrs within a zone pay the same total price, the more distant a zone , the higher the price. Basing-point pricing: a strategy in which the seller designates some city as a basing point and charges all custrs the freight cost from that city to the custr. Freight absorption pricing: a strategy in which the seller absorbs all or part of the freight charge in order to get the desired business. Dynamic pricing: adjusting prices continually to meet the characteristics & needs of individual customers & situations. Ex : e-bay; Amazon.com

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International pricing: The price the company charges in different countries in which they operate. The price they charge depends on factors like Economic conditions Competitive situations Laws & Regulations Development of wholesaling & retailing system Consumer perceptions & preferences

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